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LOYOLA GRAND VILLAS HOMEOWNERS (SOUTH) ASSOCIATION, INC.

, failure to file its by-laws within the period prescribed by Section 46 of the
petitioner, vs. HON. COURT OF APPEALS, HOME INSURANCE AND Corporation Code effectively automatically dissolved the corporation. The
GUARANTY CORPORATION, EMDEN ENCARNACION and HORATIO Appeals Board of the HIGC and the Court of Appeals both rejected the
AYCARDO, respondents. contention of the Petitioner affirmed the decision of Hearing Officer Javier.

G.R. No. 117188 August 7, 1997 Issue: W/N LGVHAI's failure to file its by-laws within the period prescribed
by Section 46 of the Corporation Code had the effect of automatically
ROMERO, J.: dissolving the said corporation.

Loyola Grand Villas Homeowners Association, Inc. (LGVHAI) was organized Ruling: No.
on 8 February 1983 as the homeoenwers' association for Loyola Grand
Villas. It was also registered as the sole homeowners' association in the The pertinent provision of the Corporation Code that is the focal point of
said village with the Home Financing Corporation (which eventually controversy in this case states:
became Home Insurance Guarantee Corporation ["HIGC"]). However, the Sec. 46. Adoption of by-laws. - Every corporation formed under this Code,
association was not able file its corporate by-laws. must within one (1) month after receipt of official notice of the issuance of
its certificate of incorporation by the Securities and Exchange Commission,
The LGVHAI officers then tried to registered its By-Laws in 1988, but they adopt a code of by-laws for its government not inconsistent with this Code.
failed to do so. They then discovered that there were two other Ordinarily, the word "must" connotes an imposition of duty which must be
homeowners' organizations within the subdivision - the Loyola Grand Villas enforced. However, the word "must" in a statute, like "shall," is not always
Homeowners (North) Association, Inc. [North Association] and herein imperative. It may be consistent with an ecercise of discretion. If the
Petitioner Loyola Grand Villas Homeowners (South) Association, language of a statute, considered as a whole with due regard to its nature
Inc.["South Association]. and object, reveals that the legislature intended to use the words "shall"
and "must" to be directory, they should be given that meaning.
Upon inquiry by the LGVHAI to HIGC, it was discovered that LGVHAI was
dissolved for its failure to submit its by-laws within the period required by The legislative deliberations of the Corporation Code reveals that it was
the Corporation Code and for its non-user of corporate charter because not the intention of Congress to automatically dissolve a corporation for
HIGC had not received any report on the association's activities. These failure to file the By-Laws on time.
paved the way for the formation of the North and South Associations.
Moreover, By-Laws may be necessary to govern the corporation, but By-
LGVHAI then lodged a complaint with HIGC Hearing Officer Danilo Javier, Laws are still subordinate to the Articles of Incorporation and the
and questioned the revocation of its registration. Hearing Officer Javier Corporation Code. In fact, there are cases where By-Laws are unnecessary
ruled in favor of LGVHAI, revoking the registration of the North and South to the corporate existence and to the valid exercise of corporate powers.
Associations.
The Corporation Code does not expressly provide for the effects of non-
Petitioner South Association appealed the ruling, contending that LGVHAI's filing of By-Laws. However, these have been rectified by Section 6 of PD
902-A which provides that SEC shall possess the power to suspend or original owner, Manuel Gonzalez
revoke, after proper notice and hearing, the franchise or certificate of Despite repeated demands, Nolasco refused to register
registration of corporations upon failure to file By-Laws within the required said shares in his name in the books of the corporation
period. caused him damages amounting to P500
Nolasco's defense:
This shows that there must be notice and hearing before a corporation is article 12 of its by-laws: it had preferential right
dissolved for failure to file its By-Laws. Even assuming that the existence of to buy the shares at the par value of P100/share, plus
a ground, the penalty is not necessarily revocation, but may only be P90 as dividends corresponding to the year 1922
suspension. offer was refused by Fleischer
Trial Court: favored Fleischer and ordered the shared be
By-Laws are indispensable to corporations, since they are required by law registered
for an orderly management of corporations. However, failure to file them ISSUE: W/N article 12 of Nolasco's by-laws is in conflict with Act No. 1459
within the period prescribed does not equate to the automatic dissolution (Corporation Law), especially with section 35 (Now Sec. 63)
of a corporation.
HELD: Affirmed. mandamus will lie to compel the officers of the
Fleischer vs. Botica Nolasco corporation to transfer said stock upon the books of the corporation
Section 13, paragraph 7, above-quoted, empowers a
FACTS: corporation to make by-laws, not inconsistent with any existing
law, for the transferring of its stock.
March 13, 1923: Manuel Gonzales made a written section 35 of Act No. 1459 (now Sec. 63)
statement to the Botica Nolasco, Inc., requesting that 5 shares of contemplates no restriction as to whom they
stock sold by him to Henry Fleischer be noted transferred to may be transferred or sold
Fleischer's name It does not suggest that any
He also acknowledged in said written statement discrimination may be created by the
the preferential right of the corporation to buy said five corporation in favor or against a certain
shares purchaser.
June 14, 1923: he withdraw and cancelled his written The holder of shares, as owner of personal
statement of March 13, 1923 property, is at liberty, under said section, to dispose of
Nolasco replied that his letter of June 14th was them in favor of whomsoever he pleases, without any
of no effect, and that the shares in question had been other limitation in this respect, than the general
registered in the name of the Botica Nolasco, Inc., provisions of law
November 15, 1923: Fleischer GR: the by-laws of a corporation are valid if they are
filed an amended complaint against the Botica Nolasco, reasonable and calculated to carry into effect the objects of the
Inc., alleging that he became the owner of 5 shares of fully corporation, and are not contradictory to the general policy of the
paid stock of Botica Nolasco Co (Nolasco) by purchase from their laws of the land
A by-law cannot take away or abridge the On March 16, 1926, the first offer for the purchase of the San Clemente
substantial rights of stockholder. land was received by El Hogar Filipino. This offer was made to it in writing
Under a statute authorizing by- laws for the by one Alcantara, and upon his failure to do so El Hogar Filipino treated the
transfer of stock, a corporation can do no more than contract with him as rescinded, and efforts were made at once to find
prescribe a general mode of transfer on the corporate another buyer. Finally the land was sold to Doña Felipa Alberto for P6,000
books and cannot justify an unreasonable restriction on July 30, 1926.
upon the right of sale. it is contended that the five year period did not begin to run against the
by-law cannot operate to defeat his rights as a purchaser respondent until May 7, 1921, when the register of deeds of Tarlac
who obtained them in good faith and for a valuable consideration. delivered the new certificate of title to the respondent pursuant to the
deed by which the property was acquired.
THE GOVERNMENT OF THE PHILIPPINE ISLANDS vs. EL HOGAR FILIPINO Again, it is urged for the respondent that the period between March 25,
FACTS: This is a quo warranto proceeding instituted originally in this court 1926, and April 30, 1926, should not be counted as part of the five-year
by the Government of the Philippine Islands on the relation of the period. This was the period during which the respondent was under
Attorney-General against the building and loan association known as El obligation to sell the property to Alcantara
Hogar Filipino, for the purpose of depriving it of its corporate franchise, In the case before us the respondent corporation has in good faith
excluding it from all corporate rights and privileges, and effecting a final disposed of the piece of property which appears to have been in its hands
dissolution of said corporation. at the expiration of the period fixed by law, and a fair explanation is given
The respondent, El Hogar Filipino, was apparently the first corporation of its failure to dispose of it sooner. The discretion permitted to this court
organized in the Philippine Islands under the provisions cited, and the in the application of the remedy of quo warranto forbids so radical a use of
association has been favored with extraordinary success. the remedy.
Issues: First cause of action. — The first cause of action is based upon the Second cause of action. — The second cause of action is based upon a
alleged illegal holding by the respondent of the title to real property for a charge that the respondent is owning and holding a business lot, with the
period in excess of five years after the property had been bought in by the structure thereon, in the financial district of the City of Manila is excess of
respondent at one of its own foreclosure sales. its reasonable requirements and in contravention of subsection 5 of
it appears that in the year 1920 El Hogar Filipino foreclosed the mortgage section 13 of the corporation Law
and purchased the land at the foreclosure sale for the net amount of the As at first constructed the new building was three stories high in the main,
indebtedness. The deed conveying the property to El Hogar Filipino was but in 1920, in order to obtain greater advantage from the use of the land,
executed and delivered December 22, 1920. On December 27, 1920, the an additional story was added to the building, making a structure of four
deed conveying the property to El Hogar Filipino was sent to the register of stories except in one corner where an additional story was place, making it
deeds of the Province of Tarlac. Said deed was received in the office of the five stories high over an area of 117.52 square meters
register of deeds of Tarlac on December 28, 1920. it is supposed that the acquisition of this lot, the construction of the new
For months no reply was received by El Hogar Filipino from the register of office building thereon, and the subsequent renting of the same in great
deeds of Tarlac; a complaint was made by El Hogar Filipino to the Chief of part to third persons, are ultra vires acts on the part of the corporation,
the General Land Registration Office; and on May 7, 1921, the certificate of and that the proper penalty to be enforced against it in this action is that if
title to the San Clemente land was received. dissolution.
With this contention we are unable to agree. Under subsection 5 of section This service is limited to shareholders; but some of the persons whose
13 of the Corporation Law, every corporation has the power to purchase, properties are so managed for them became shareholders only to enable
hold and lease such real property as the transaction of the lawful business them to take advantage thereof.
of the corporation may reasonably and necessarily require. The services rendered in the management of such improved real estate by
Third cause of action. — Under the third cause of action the respondent is El Hogar Filipino consist in the renting of the same, the payment of real
charged with engaging in activities foreign to the purposes for which the estate taxes and insurance for the account of the owner, causing the
corporation was created and not reasonable necessary to its legitimate necessary repairs for upkeep to be made, and collecting rents due from
ends. The specifications under this cause of action relate to three different tenants. For the services so rendered in the management of such
sorts of activities. The first consist of the administration of the offices in properties El Hogar Filipino receives compensation in the form of
the El Hogar building not used by the respondent itself and the renting of commissions upon the gross receipts from such properties.
such offices to the public. The activities here criticized clearly fall within The practice described in the passage above quoted from the agreed facts
the legitimate powers of the respondent, If the respondent had the power is in our opinion unauthorized by law. It is a general rule of law that
to acquire the lot, construct the edifice and hold it beneficially, as there corporations possess only such express powers. The management and
decided, the beneficial administration by it of such parts of the building as administration of the property of the shareholders of the corporation is
are let to others must necessarily be lawful. not expressly authorized by law, and we are unable to see that, upon any
The second specification under the third cause of action has reference to fair construction of the law, these activities are necessary to the exercise
the administration and management of properties belonging to delinquent of any of the granted powers. The corporation, upon the point now under
shareholders of the association. In this connection it appears that in case the criticism, has clearly extended itself beyond the legitimate range of its
of delinquency on the part of its shareholders in the payment of interest, powers. But it does
premium, and dues, the association has been accustomed (pursuant to not result that the dissolution of the corporation is in order, and it will
clause 8 of its standard mortgage) to take over and manage the mortgaged merely be enjoined from further activities of this sort.
property for the purpose of applying the income to the obligations of the Fourth cause of action. — It appears that among the by laws of the
debtor party. We see no reason to doubt the validity of the clause giving association there is an article (No. 10) which reads as follows:
the association the right to take over the property which constitutes the The board of directors of the association, by the vote of an absolute
security for the delinquent debt and to manage it with a view to the majority of its members, is empowered to cancel shares and to return to
satisfaction of the obligations due to the debtor than the immediate the owner thereof the balance resulting from the liquidation thereof
enforcement of the entire obligation, and the validity of the clause whenever, by reason of their conduct, or for any other motive, the
allowing this course to be taken appears to us to be not open to doubt. continuation as members of the owners of such shares is not desirable.
The second specification under this cause of action is therefore without This by-law is of course a patent nullity, since it is in direct conflict with the
merit. latter part of section 187 of the Corporation Law, which expressly declares
The third specification under this cause of action relates to certain that the board of directors shall not have the power to force the surrender
activities. El Hogar Filipino has undertaken the management of some and withdrawal of unmatured stock except in case of liquidation of the
parcels of improved real estate situated in Manila not under mortgage to corporation or of forfeiture of the stock for delinquency.
it, but owned by shareholders, and has held itself out by advertisement as Fifth cause of action. — In section 31 of the Corporation Law it is declared
prepared to do so. that, "at all elections of directors there must be present, either in person
or by representative authorized to act by written proxy, the owners of the by-laws of the association a provision recognizing the rights of Melian, as
majority of the subscribed capital stock entitled to vote. . . ." Conformably founder, to 5 per centum of the net profits payment of the same to be
with this requirement it is declared in article 61 of the by-laws of El Hogar made to him or his heirs during the life of the association.
Filipino that, "the attendance in person or by proxy of shareholders owning As a seventh cause of action it is alleged in the complaint that this royalty
one-half plus one of the shareholders shall be necessary to constitute a of the founder is "unconscionable, excessive and out of all proportion to
quorum for the election of directors.. As the corporation has grown, the services rendered, besides being contrary to and incompatible with the
however, it has been fond increasingly difficult to get together a quorum of spirit and purpose of building and loan associations."
the shareholders, or their proxies, at the annual meetings; and with the It is our opinion that this contention is entirely without merit. No possible
exception of the annual meeting held in 1917, when a new directorate was doubt exists as to the power of a corporation to contract for services
elected, the meetings have failed for lack of quorum. rendered and to be rendered by a promoter in connection with organizing
. No fault can be imputed to the corporation on account of the failure of and maintaining the corporation..
the shareholders to attend the annual meetings. Upon failure of a quorum Eight cause of action. - Under the eight cause of action the alleged ground
at any annual meeting the directorate naturally holds over and continues is found in the presence of other articles in the by-laws, namely, articles 70
to function until another directorate is chosen and qualified. Unless the and 76,. Article 70 of the by-laws in effect requires that persons elected to
law or the charter of a corporation expressly provides that an office shall the board of directors must be holders of shares of the paid up value of
become vacant at the expiration of the term of office for which the officer P5,000 which shall be held as security may be put up in the behalf of any
was elected, the general rule is to allow the officer to holdover until his director by some other holder of shares in the amount stated. Article 76 of
successor is duly qualified. Mere failure of a corporation to elect officers the by-laws declares that the directors waive their right as shareholders to
does not terminate the terms of existing officers nor dissolve the receive loans from the association.
corporation. It is asserted, under the eight cause of action, that article 70 is
Sixth cause of action. — Under the sixth cause of action it is alleged that objectionable in that, under the requirement for security, a poor member,
the directors of El Hogar Filipino, instead of serving without pay, or or wage-earner, cannot serve as director, irrespective of other
receiving nominal pay or a fixed salary, — as the complaint supposes qualifications and that as a matter of fact only men of means actually sit on
would be proper, — have been receiving large compensation, varying in the board. Article 76 is criticized on the ground that the provision requiring
amount from time to time, out of the profits of the respondent. directors to renounce their right to loans unreasonably limits their rights
The Corporation Law does not undertake to prescribe the rate of and privileges as members. There is nothing of value in either of theses
compensation for the directors of corporations. The power to fixed the suggestions. Section 21 of the Corporation Law expressly gives the power
compensation they shall receive, if any, is left to the corporation, to be to the corporation to provide in its by-laws for the qualifications of
determined in its by-laws(Act No. 1459, sec. 21). directors.
Seventh cause of action. — It appears that the promoter and organizer of Ninth cause of action. — The specification under this head is in effect that
El Hogar Filipino was Mr. Antonio Melian, and in the early stages of the the respondent has abused its franchise in issuing "special" shares. The
organization of the association the board of directors authorized the issuance of these shares is allege to be illegal and inconsistent with the
association to make a contract with him with regard to the services him plan and purposes of building and loan associations; and in particular, it is
therefor. alleged that they are, in the main, held by well-to-wage-earners for
In conformity with this agreement there was inserted in section 92 of the accumulating their modest savings for the building of homes.
The ground for supposing the issuance of the "special" shares to be centum, regardless of losses suffered and profits made by the corporation
unlawful is that special shares are not mentioned in the Corporation Law and in contravention of the requirements of section 188 of the Corporation
as one of the forms of security which may be issued by the association Law.
Upon an elaborate review of the authorities, the court, though divided, It is insisted in the brief of the Attorney-General that the maintenance of
adhered to the principle announced in the earlier case and held that the reserve funds is unnecessary in the case of building and loan associations,
issuance of the special shares did not affect the respondent's character as and at any rate the keeping of reserves is inconsistent with section 188 of
a building and loan association nor make its loans usurious. the Corporation Law.
Upon examination of the nature of the special shares in the light of Upon careful consideration of the questions involved we find no reason to
American usage, it will be found that said shares are precisely the same doubt the right of the respondent to maintain these reserves. It is true that
kind of shares that, in some American jurisdictions, are generally known as the corporation law does not expressly grant this power, but we think it is
advance payment shares; in if close attention be paid to the language used to be implied.
in the last sentence of section 178 of the Corporation Law, it will be found If it be supposed that the reserves referred to have become excessive, the
that special shares where evidently created for the purpose of meeting the remedy is in the hands of the Legislature.
condition cause by the prepayment of dues that is there permitted. Thirteenth cause of action. — The specification under this head is, in
Tenth cause of action. — Under this head of the complaint it is alleged that effect, that the respondent association has made loans which, to the
the defendant is pursuing a policy of depreciating, at the rate of 10 per knowledge of the associations officers were intended to be used by the
centum per annum, the value of the real properties acquired by it at its borrowers for other purposes than the building of homes
sales; and it is alleged that this rate is excessive. ..Upon these facts an elaborate argument has been constructed in behalf
The agreed statement of facts on this point shows that the annual average of the plaintiff to the effect that in making loans for other purposes than
varies from nothing to a maximum of something over 14 per centum. We the building of residential houses the association has illegally departed
are thus left in the dark as to the precise depreciation allowed from year to from its character and made itself amenable to the penalty of dissolution.
year. Aside from being directly opposed to the decision of this court in Lopez
The Attorney-General questions the exercise of the direction confided to and Javelona vs. El Hogar Filipino and Registrar of Deeds of Occidental
the board; and it is insisted that the excessive depreciation of the property Negros (47 Phil., 249), this contention finds no substantial support in the
of the association is objectionable in several respects, but mainly because prevailing decisions made in American courts
it tends to increase unduly the reserves of the There is no statute here expressly declaring that loans may be made by
association, thereby frustrating the right of the shareholders to participate these associations solely for the purpose of building homes. On the
annually and equally in the earnings of the association. contrary, the building of homes is mentioned in section 171 of the
Certainly this court cannot undertake to control the discretion of the board Corporation Law as only one among several ends which building and loan
of directors of the association about an administrative matter as to which associations are designed to promote
they have legitimate power of action. The thirteenth cause of action must therefore be pronounced unfounded.
Eleventh and twelfth causes of action. —. The specification in the eleventh Fourteenth cause of action. — The specification under this head is that the
cause of action is that the respondent maintains excessive reserve funds, loans made by the defendant for purposes other than building or acquiring
and in the twelfth cause of action that the board of directors has settled homes have been extended in extremely large amounts and to wealthy
upon the unlawful policy of paying a straight annual dividend of 10 per persons and large companies
The law states no limit with respect to the size of the loans to be made by of its loans, the defendant has no various occasions sold some of the said
the association. That matter is confided to the discretion of the board of real estate on credit, transferring the title thereto to the purchaser; that
directors; and this court cannot arrogate to itself a control over the the properties sold are then mortgaged to the defendant to secure the
discretion of the chosen officials of the company. payment of the purchase price, said amount being considered as a loan,
The fourteenth cause of action is therefore obviously without merit. and carried as such in the books of the defendant, and that several such
Fifteenth cause of action. — The criticism here comes back to the obligations are still outstanding. It is further charged that the persons and
supposed misdemeanor of the respondent in maintaining its reserve funds, entities to which said properties are sold under the condition charged are
— a matter already discussed under the eleventh and twelfth causes of not members or shareholders nor are they made members or shareholders
action. Under the fifteenth cause of action it is claimed that upon the of the defendant.
expiration of the franchise of the association through the effluxion of time, This part of the complaint is based upon a mere technicality of
or earlier liquidation of its business, the accumulated reserves and other bookkeeping. The central idea involved in the discussion is the provision of
properties will accrue to the founder, or his heirs, and the then directors of the Corporation Law requiring loans to be stockholders only and on the
the corporation and to those persons who may at that time to be holders security of real estate and shares in the corporation, or of shares alone. It
of the ordinary and special shares of the corporation seems to be supposed that, when the respondent sells property acquired
. It seems to us that this is matter that may be left to the prevision of the at its own foreclosure sales and takes a mortgage to secure the deferred
directors or to legislative action if it should be deemed expedient to payments, the obligation of the purchaser is a true loan, and hence
require the gradual suppression of the reserve funds as the time for prohibited. But in requiring the respondent to sell real estate which it
dissolution approaches. It is no matter for judicial interference, and much acquires in connection with the collection of its loans within five years
less could the resumption of the franchise on this ground be justified. after receiving title to the same, the law does not prescribe that the
There is no merit in the fifteenth cause of action. property must be sold for cash or that the purchaser shall be a shareholder
Sixteenth cause of action. — This part of the complaint assigns as cause of in the corporation. Such sales can of course be made upon terms and
action that various loans now outstanding have been made by the conditions approved by the parties; and when the association takes a
respondent to corporations and partnerships, and that these entities have mortgage to secure the deferred payments, the obligation of the purchaser
in some instances subscribed to shares in the respondent for the sole cannot be fairly described as arising out of a loan. Nor does the fact that it
purpose of obtaining such loans. …It is also admitted that some of these is carried as a loan on the books of the respondent make it a loan on the
juridical entities became shareholders merely for the purpose of qualifying books of the respondent make it a loan in law. The contention of the
themselves to take loans from the association, Government under this head is untenable.
Of course the mere motive with which subscriptions are made, whether to HELD/CONCLUSION:
qualify the stockholders to take a loan or for some other reason, is of no In conclusion, the respondent is enjoined in the future from administering
moment in determining whether the subscribers were competent to make real property not owned by itself, except as may be permitted to it by
the contracts. The result is that we find nothing in the allegations of the contract when a borrowing shareholder defaults in his obligation. In all
sixteenth cause of action, or in the facts developed in connection other respects the complaint is dismissed, without costs. So ordered.
therewith, that would justify us in granting the relief.
Seventeenth cause of action. — Under the seventeenth cause of action, it Gokongwei vs. SEC, 89 SCRA 336 (1979)
is charged that in disposing of real estates purchased by it in the collection Post under case digests, Commercial Law at Monday, January 30, 2012
Posted by Schizophrenic Mind by-laws for its internal government, and to regulate the conduct and
Facts: Petitioner, stockholder of San Miguel Corp. filed a petition with the prescribe the rights and duties of its members towards itself and among
SEC for the declaration of nullity of the by-laws etc. against the majority themselves in reference to the management of its affairs. A corporation,
members of the BOD and San Miguel. It is stated in the by-laws that the under the Corporation law, may prescribe in its by-laws the qualifications,
amendment or modification of the by-laws may only be delegated to the duties and compensation of directors, officers, and employees. Any person
BODs upon an affirmative vote of stockholders representing not less than who buys stock in a corporation does so with the knowledge that its affairs
2/3 of the subscribed and paid uo capital stock of the corporation, which are dominated by a majority of the stockholders and he impliedly contracts
2/3 could have been computed on the basis of the capitalization at the that the will of the majority shall govern in all matters within the limits of
time of the amendment. Petitioner contends that the amendment was the acts of incorporation and lawfully enacted by-laws and not forbidden
based on the 1961 authorization, the Board acted without authority and in by law. Any corporation may amend its by-laws by the owners of the
usurpation of the power of the stockholders n amending the by-laws in majority of the subscribed stock. It cannot thus be said that petitioners has
1976. He also contends that the 1961 authorization was already used in the vested right, as a stock holder, to be elected director, in the face of the
1962 and 1963. He also contends that the amendment deprived him of his fact that the law at the time such stockholder's right was acquired
right to vote and be voted upon as a stockholder (because it disqualified contained the prescription that the corporate charter and the by-laws shall
competitors from nomination and election in the BOD of SMC), thus the be subject to amendment, alteration and modification. A Director stands in
amended by-laws were null and void. While this was pending, the a fiduciary relation to the corporation and its shareholders, which is
corporation called for a stockholder’s meeting for the ratification of the characterized as a trust relationship. An amendment to the corporate by-
amendment to the by-laws. This prompted petitioner to seek for summary laws which renders a stockholder ineligible to be director, if he be also
judgment. This was denied by the SEC. In another case filed by petitioner, director in a corporation whose business is in competition with that of the
he alleged that the corporation had been using corporate funds in other other corporation, has been sustained as valid. This is based upon the
corps and businesses outside the primary purpose clause of the principle that where the director is employed in the service of a rival
corporation in violation of the Corporation Code. company, he cannot serve both, but must betray one or the other. The
amendment in this case serves to advance the benefit of the corporation
Issue: Are amendments valid? and is good. Corporate officers are also not permitted to use their position
of trust and confidence to further their private needs, and the act done in
Held: The validity and reasonableness of a by-law is purely a question of furtherance of private needs is deemed to be for the benefit of the
law. Whether the by-law is in conflict with the law of the land, or with the corporation. This is called the doctrine of corporate opportunity.
charter of the corporation or is in legal sense unreasonable and therefore
unlawful is a question of law. However, this is limited where the Case Digest: Grace Christian High School v. CA
reasonableness of a by-law is a mere matter of judgment, and one upon
which reasonable minds must necessarily differ, a court would not be GRACE CHRISTIAN HIGH SCHOOL, petitioner,vs. THE COURT OF APPEALS,
warranted in substituting its judgment instead of the judgment of those GRACE VILLAGE ASSOCIATION, INC., ALEJANDRO G. BELTRAN, and
who are authorized to make by-laws and who have exercised authority. ERNESTO L. GO, respondents.
The Court held that a corporation has authority prescribed by law to
prescribe the qualifications of directors. It has the inherent power to adopt G.R. No. 108905 October 23, 1997
Guaranty Corporation (HIGC) to compel the board of directors to recognize
MENDOZA, J.: its right to a permanent seat in the board.

Petitioner Grace Christian High School is an educational institution located Meanwhile, the opinion of the SEC was sought by the association, and SEC
at the Grace Village in Quezon City, while Private respondent Grace Village rendered an opinion to the effect that the practice of allowing unelected
Association, Inc. ["Association'] is an organization of lot and/or building members in the board was contrary to the existing by-laws of the
owners, lessees and residents at Grace Village. association and to §92 of the Corporation Code (B.P. Blg. 68). This was
adopted by the association in its Answer in the mandamus filed with the
The original 1968 by-laws provide that the Board of Directors, composed of HIGC.
eleven (11) members, shall serve for one (1) year until their successors are
duly elected and have qualified. The HIGC hearing officer ruled in favor of the association, which decision
was affirmed by the HIGC Appeals Board and the Court of Appeals.
On 20 December 1975, a committee of the board of directors prepared a
draft of an amendment to the Issue: W/N the 1975 provision giving the petitioner a permanent board
by-laws which provides that "GRACE CHRISTIAN HIGH SCHOOL seat was valid.
representative is a permanent
Director of the ASSOCIATION." Ruling: No.

However, this draft was never presented to the general membership for Section 23 of the Corporation Code (and its predecessor Section 28 and 29
approval. Nevertheless, from 1975 to 1990, petitioner was given a of the Corporation Law) leaves no room for doubt that the Board of
permanent seat in the board of directors of the association. Directors of a Corporation must be elected from among the stockholders
or members.
On 13 February 1990, the association's committee on election sought to
change the by-laws and informed the Petitioner's school principal "the There may be corporations in which there are unelected members in the
proposal to make the Grace Christian High School representative as a board but it is clear that in these instances, the unelected members sit as
permanent director of the association, although previously tolerated in the ex officio members, i.e., by virtue of and for as long as they hold a
past elections should be reexamined." particular office (e.g. whoever is the Archbishop of Manila is considered a
member of the board of Cardinal Santos Memorial Hospital, Inc.)
Following this advice, notices were sent to the members of the association
that the provision on election of directors of the 1968 by-laws of the But in the case of petitioner, there is no reason at all for its representative
association would be observed. Petitioner requested the chairman of the to be given a seat in the board. Nor does petitioner claim a right to such
election committee to change the notice to honor the 1975 by-laws seat by virtue of an office held. In fact it was not given such seat in the
provision, but was denied. beginning. It was only in 1975 that a proposed amendment to the by-laws
sought to give it one.
The school then brought suit for mandamus in the Home Insurance and
Since the provision in question is contrary to law, the fact that it has gone asserting that he merely incurred a debt to respondent when the latter
unchallenged for fifteen years cannot forestall a later challenge to its advanced the funds for the purchase of the share. On the other hand,
validity. Neither can it attain validity through acquiescence because, if it is AmChain asserts beneficial ownership whereby petitioner only holds the
contrary to law, it is beyond the power of the members of the association share in its name but the beneficial title belongs to private respondent.
to waive its invalidity. The trial court awarded the share to Thomson on the ground that the
Articles of incorporation of Manila Polo Club prohibits artificial persons to
It is more accurate to say that the members merely tolerated petitioner's be club members. The Court of Appeals reversed the decision.
representative and tolerance cannot be considered ratification.
ISSUE:
Nor can petitioner claim a vested right to sit in the board on the basis of Whether or not petitioner has the obligation to transfer the MPG shares to
"practice." Practice, no matter how long continued, cannot give rise to any the nominee of AMCHAM.
vested right if it is contrary to law.
RULING:
THOMSON vs. CA YES. Petitioner is obligated to transfer the MPG shares to the nominee of
GR. No. 116631; October 28, 1998 AmCham as he is merely holding the shares in trust. When AmCham paid
FACTS: the purchase price for the share but Thomson was given legal title thereto,
a resulting trust is presumed as a matter of law. As an officer of AMCHAM,
Petitioner Marsh Thomson was an officer of the respondent American petitioner occupied a fiduciary position in the business of AmCham. The
Chamber of Commerce AmCham) for over ten years. When his superior respondent’s purpose in acquiring the share was to provide additional
retired, the latter’s proprietary share in the Manila Polo Club (MPC) was incentive to its chosen executive. Although the share was placed in the
listed in Thomson’s name and paid for by AmCham through his retiring name of the petitioner, his title is limited to usufruct, that is, to enjoy the
superior’s intercession. Thomson paid the corresponding transfer fee but facilities and privileges of such membership. Such arrangement reflects a
AmCham subsequently reimbursed the amount. However, it was agreed trust relationship governed by the law and equity.
that Thomson shall execute a document recognizing AmCham’s beneficial
ownership over the shares. He failed to do so despite the many demands SALAFRANCA V. PHILAMLIFE (PAMPLONA) VILLAGE HOMEOWNERS
from AmCham management. When petitioner’s contract of employment ASSOCIATION, INC. 300 SCRA 469 1998
was up for renewal, he notified his employer of his unwillingness to
continue his services. AmChain, however, asked the former to stay on for DOCTRINE: Common Law Limitations on By-Laws – it cannot be contrary to
another six (6) months. The petitioner made a counter-proposal, that he law and Articles of Incorporation
shall accept it if he shall be allowed to retain the shares after reimbursing
AmCham the purchase price. It was rejected. Pending the negotiation, FACTS:
AmCham executed a Release and Quitclaim of its claims against Thomsoin. Petitioner Enrique Salafranca started working with the private respondent
The quitclaim did not mention the MPC shares. The company demanded Philamlife Village Homeowners Association on May 1, 1981 as
the return of the MPC shares and the transfer of said shares to the administrative officer for a period of six months. From this date until
nominee of AMCHAM but Thomson claims ownership of the MPG shares, December 31, 1983, petitioner was reappointed to his position three more
times. As administrative officer, petitioner was generally responsible for of 3 July 1987.
the management of the villages day to day activities. After petitioners term
of employment expired on December 31, 1983, he still continued to work ISSUES:
in the same capacity, albeit, without the benefit of a renewed contract. Petitioner was illegally dismissed by private respondents.
Sometime in 1987, private respondent decided to amend its by-laws.
Included therein was a provision regarding the position of administrative RULING:
officer under which said officer shall hold office at the pleasure of the 1. YES. Private respondent Philamlife Village Homeowners Association is
Board of Directors; private respondent, then, informed the petitioner that ORDERED: (1) to pay petitioner Enrique Salafranca separation pay
his term of office shall be coterminus with the Board of Directors which equivalent to one month salary for every year of service; (2) to pay his full
appointed him to his position. Furthermore, until he submits a medical backwages (3) to pay his retirement pay in accordance with Article 287 of
certificate showing his state of health, his employment shall be on a the Labor Code, as amended by Republic Act No. 7641, (4) to pay moral
month-to-month basis. Oddly, notwithstanding the failure of herein and exemplary damages in the amount of twenty thousand (P20,000.00)
petitioner to submit his medical certificate, he continued working until his pesos and ten thousand (P10,000.00) pesos, respectively; and (5) to pay
termination in December 1992. Claiming that his services had been ten (10%) percent of the total amount due to petitioner, as attorneys fees.
unlawfully and unceremoniously dispensed with, petitioner filed a Consequently, the respondent NLRC is ORDERED to COMPUTE the total
complaint for illegal dismissal with money claims and for damages. monetary benefits awarded in accordance with this decision and to submit
its compliance thereon within thirty (30) days from notice of this decision.
LA: Private respondent to pay the petitioner the amount of P257,833.33 * Although the right to amend by-laws lies solely in the discretion of the
representing his backwages, separation pay and 13th month pay. employer, this being in the exercise of management prerogative or
Respondents contention that complainants term of employment was co- business judgment, such right cannot impair the obligation of existing
terminus with the term of Office of the Board of Directors, is wanting in contracts or rights or undermine the right to security of tenure of a regular
merit. Amendment would not be applicable to the case of complainant employee. Otherwise, it would enable an employer to remove any
who had become a regular employee long time before the Amendment employee from employment by the simple expediency of amending its by-
took place. Moreover, the Amendment should be applied prospectively laws and providing the position shall cease to exist upon occurrence of a
and not retroactively. specified event. Finally, we cannot simply ignore private respondents
malicious scheme to remove petitioner from his position, which is contrary
Appeal to NLRC: Reversed the decision of the Labor Arbiter and rendered a to good customs and effected in an oppressive manner, thus warranting an
new one reducing petitioners monetary award to only one-half (1/2) award of moral and exemplary damages to the petitioner.
month pay for every year of service representing his retirement pay. In * Petitioner enjoys the right to security of tenure and his services may be
other words, the NLRC viewed the dismissal of the petitioner as a valid act terminated only for causes provided by law. Viewed in this light, while
by the private respondent. The fact that he continued to perform the private respondent has the right to terminate the services of petitioner,
function of the office of administrative officer without extension or re- this is subject to both substantive and procedural grounds. The substantive
appointment thereafter, to our mind, did not in any way make his causes for dismissal are those provided in Articles 282 and 283 of the Labor
employment permanent as in fact, he was even reminded of the nature of Code, while the procedural grounds refer to the observance of the
his position by then president of the association Jaime Y. Ladao in a letter requirement of due process.
o Substantive: no evidence to show gross negligence and serious pledged his Stock certificate to China Banking Corporation (China Bank).
misconduct as the causes of petitioner’s dismissal. In the proceedings China Bank wrote Valley Golf requesting that the pledge agreement be
before the Labor Arbiter and NLRC, it is noteworthy that private recorded in its books. Valley Golf replied that the deed of pledge executed
respondent never raised the issue of compulsory retirement. This omission by Calapatia in China Bank's favor was duly noted in its corporate books.
is fatal to private respondents cause, for the rule is well-settled that Calapatia obtained a loan of P20K from China Bank, payment of which was
matters, theories or arguments not brought out in the proceedings below secured by the pledge agreement existing between Calapatia and China
will ordinarily not be considered by a reviewing court, as they cannot be Bank. Calapatia failed to pay his obligation thus China Bank filed a petiton
raised for the first time on appeal. for extrajudicial foreclosure before Notary Publicde Vera requesting the
o Procedural: no notice and hearing; violation of due process latter to conduct a public auction sale of the pledged stock. China Bank
informed Valley Golf of the foreclosure proceedings and requested that
Salafranca vs. Philamlife homeowners asso. the pledged stock be transferred to its name and that the same be
FACTS: In 1981, Enrique Salafranca was hired as an administrative officer recorded in the record books. However, Valley Golf wrote China Bank
by the Philamlife Village Homeowners Associaiton, Inc. (PVHAI). Salafranca expressing its inability to accede to China Bank's request in view of
was tasked to manage the village’s day to day activities. His employment Calapatia's unsettled accounts with the club. Despite of the foregoing, the
was originally for 6 months only but his contract was renewed multiple notary public held a public auction and China Bank emerged s the highest
times until 1983. But even after 1983, he was still allowed to continue bidder. Consequently China Bank was issued the corresponding certificate
work even without a renewed contract. In 1987, PVHAI amended its by- of sale.
laws. Among the amendment was a provision that the administrative Valley Golf sent Calapatia a notice demanding full payment of his overdue
officer (Salafranca) shall have a tenure which is co-terminus with the Board account. Said notice was followed by a demand letter for the same amount
of Directors which appointed him. In 1992, the tenure of said Board of and another notice. Valley Golf caused to be published in the newspaper
Directors expired and so Salafranca was terminated. Daily Express a notice of auction sale of a number of its stock certificates,
ISSUE: Whether or not Salafranca was illegally dismissed. which included Calapatia's own share of stock. Valley Golf informed
HELD: Yes. At that time, Salafranca already enjoys security of tenure Calapatia of the termination of his membership due to the sale of his share
because he is already a regular employee. It is true that PVHAI has the of stock in the auction. China Bank advised Valley Golf that it is the new
right to amend its by-laws but such amendment must not impair existing owner of Calapatia’s stock certificate by virtue of being the highest bidder
contracts or rights. In this case, the provision that Salafranca’s position in the auction and requested that a new certificate of stock be issued in its
shall be co-terminus with the appointing Board impairs his right to security name. Valley Golf replied that “for reason of delinquency” Calapatia’s
of tenure which has already vested even prior to the amendment of the stock was sold at another public auction
by-laws in 1987. China Bank protested the sale by Valley Golf of the subject share of stock
and thereafter filed a case with the RTC of Makati for the nullification of
CHINA BANKING CORPORATION vs. COURT OF APPEALS and VALLEY GOLF the auction sale by Valley Golf and for issuance of a new stock certificate in
AND COUNTRYCLUB, INC. its name.
GR No. 117604| March 26, 1997| 270 SCRA 503 RTC of Makati City: dismissed the complaint for lack of jurisdiction over the
Facts: subject matter on the theory that it involves an intra-corporate dispute;
Calapatia, Jr a stockholder of Valley Golf and Country Club (Valley Golf) motion for reconsideration by China Bank was also denied.
China Bank filed a complaint with the SEC for the nullification of the sale of concerns and its stockholders or members and directors and officers with
Calapatia’s stock by Valley Golf, cancellation of any new stock certificate relation thereto and among themselves in their relation to it. In other
issued pursuant thereto; for issuance of a new stock certificate in China words, by-laws are the relatively permanent and continuing rules of action
Bank’s name. adopted by the corporation for its own government and that of the
SEC hearing officer: decided in favor of Valley Golf, stating in the main that individuals composing it and having the direction, management and
considering that the said share is delinquent, Valley Golf had valid reason control of its affairs, in whole or in part, in the management and control of
not to transfer the share in the name of China Bank in the books of Valley its affairs and activities. (9 Fletcher 4166. 1982 Ed.)
Golf until liquidation of delinquency. Consequently, case was dismissed The purpose of a by-law is to regulate the conduct and define the duties of
China Bank appealed to SEC en banc: issued an order reversing the the members towards the corporation and among themselves. They are
decision of its hearing officer; holding that China Bank has a prior right self-imposed and, although adopted pursuant to statutory authority, have
over the pledged share and because of the pledgor’s failure to pay the no status as public law. (Ibid.)
principal debt upon maturity, China Bank can proceed with the foreclosure Therefore, it is the generally accepted rule that third persons are not
of the pledged share bound by by-laws, except when they have knowledge of the provisions
* Ruling that the auction sale conducted by Valley Gold is declared null and either actually or constructively. In the case of Fleisher v. Botica Nolasco,
void and ordering Valley Golf to issue another membership certificate in 47 Phil. 584, the Supreme Court held that the by-law restricting the
the name of China Bank transfer of shares cannot have any effect on the the transferee of the
* Motion for Reconsideration by Valley Golf à denied shares in question as he "had no knowledge of such by-law when the
CA: nullified and set aside the orders of the SEC and its hearing officer on shares were assigned to him. He obtained them in good faith and for a
the ground of lack of jurisdiction over the subject matter, and dismissed valuable consideration. He was not a privy to the contract created by the
China Bank’s original complaint by-law between the shareholder . . . and the Botica Nolasco, Inc. Said by-
Hence this petition for review on certiorari by China Bank. law cannot operate to defeat his right as a purchaser."
Issue: By analogy of the above-cited case, the Commission en banc is of the
Whether or not Valley Golf and Country Club’s by-laws bind China Banking opinion that said case is applicable to the present controversy. Appellant-
Corporation petitioner bank as a third party can not be bound by appellee-respondent's
Held: by-laws. It must be recalled that when appellee-respondent communicated
In order to be bound, the third party must have acquired knowledge of the to appellant-petitioner bank that the pledge agreement was duly noted in
pertinent by-laws at the time the transaction or agreement between said the club's books there was no mention of the shareholder-pledgor's unpaid
third party and the shareholder was entered into, in this case, at the time accounts. The transcript of stenographic notes of the June 25, 1991
the pledge agreement was executed. VGCCI could have easily informed Hearing reveals that the pledgor became delinquent only in 1975. Thus,
petitioner of its by-laws when it sent notice formally recognizing petitioner appellant- petitioner was in good faith when the pledge agreement was
as pledgee of one of its shares registered in Calapatia's name. Petitioner's contracted.
belated notice of said by-law s at the time of foreclosure will not suffice. The Commission en banc also believes that for the exception to the general
The ruling of the SEC en banc is particularly instructive: accepted rule that third persons are not bound by by-laws to be applicable
By-laws signifies the rules and regulations or private laws enacted by the and binding upon the pledgee, knowledge of the provisions of the VGCCI
corporation to regulate, govern and control its own actions, affairs and By- laws must be acquired at the time the pledge agreement was
contracted. Knowledge of said provisions, either actual or constructive, at April 16, 2009
the time of foreclosure will not affect TINGA, J.
pledgee's right over the pledged share. Art. 2087 of the Civil Code provides
that it is also of the essence of these contracts that when the principal
obligation becomes due, the things in which the pledge or mortgage Summary: Cong. Caram died. He left an estate including his shares at Valley
consists maybe alienated for the payment to the creditor. Golf. Come partition of his estate, the wife found out that the shares of her
x x x Similarly, VGCCI's contention that petitioner is duty-bound to know its husband at Valley Golf were already sold. Hence, the suit. SC ruled in favor
by-laws because of Art. 2099 of the Civil Code, which stipulates that the of the wife as Valley Golf was in found to have been in bad faith. ***It’s
creditor must take care of the thing pledged with the diligence of a good important to zone in on the relevance of corporate by laws and Articles of
father of a family, fails to convince. The case of Cruz & Serrano v. Chua A. H Incorporation.
. Lee, is clearly not applicable:
In applying this provision to the situation before us it must be borne in FACTS: Petitioner is a duly constituted non-stock, non-profit corporation
mind that the ordinary pawn ticket is a document by virtue of which the which operates a golf course. The members and their guests are entitled to
property in the thing pledged passes from hand to hand by mere delivery play golf on the said course and avail of the facilities and privilege. The
of the ticket; and the contract of the pledge is, therefore, absolvable to shareholders are likewise assessed monthly membership dues.
bearer. It results that one who takes a pawn ticket in pledge acquires Cong. Fermin Z. Caram, Jr., respondent’s husband, subscribed and paid in
domination over the pledge; and it is the holder who must renew the full 1 Golf Share of the petitioner and was subsequently issued with a stock
pledge, if it is to be kept alive. certificate which indicated a par value of P9,000.00. It was alleged by the
It is quite obvious from the aforequoted case that a membership share is petitioner that Caram stopped paying his monthly dues and that it has sent
quite different in character from a pawn ticket and to reiterate, petitioner 5 letters to Caram concerning his delinquent account. The Golf Share was
was never informed of Calapatia' s unpaid accounts and the restrictive subsequently sold at public auction for P25,000.00 after the BOD had
provisions in VGCCI's by-law s. authorized the sale and the Notice of Auction Sale was published in the
Finally, Sec. 63 of the Corporation Code which provides that "no shares of Philippine Daily Inquirer
stock against which the corporation holds any unpaid claim shall be Caram thereafter died and hiis wife initiated intestate proceedings before
transferable in the books of the corporation" cannot be utilized by VGCCI. the RTC of IloIlo. Unaware of the pending controversy over the Golf Share,
The term "unpaid claim" refers to "any unpaid claim arising from unpaid the Caram family and the RTC included the Golf Share as part of Caram’s
subscription, and not to any indebtedness which a subscriber or estate. The RTC approved a project of partition of Caram’s estate and the
stockholder may owe the corporation arising from any other transaction." Golf Share was adjudicated to the wife, who paid the corresponding estate
In the case at bar, the subscription for the share in question has been fully tax due, including that on the golf Share.
paid as evidenced by the issuance of Membership Certificate No. 1219. It was only through a letter that the heirs of Caram learned of the sale of
What Calapatia owed the corporation were merely the monthly dues. the Golf Share following their inquiry with Valley Golf about the Golf Share.
Hence, the aforequoted provision does not apply. After a series of correspondence, the Caram heirs were subsequently
informed in a letter that they were entitled to the refund of P11,066.52
Valley Golf & Country vs Viuda de Caram out of the proceeds of the sale of the Golf Share, which amount had been
GR No. 158805 in the custody of the petitioner.
upon the failure of the stockholder to pay the unpaid subscription.
Caram’s wife filed an action for reconveyance of the Golf Share with Delinquency in monthly club dues was merely an ordinary debt
damages before the SEC against Valley Golf. The SEC Hearing Officer enforceable by judicial action in a civil case. A provision creating a lien
rendered a decision in favor of the wife, ordering Valley Golf to convey upon shares of stock for unpaid debts, liabilities, or assessments of
ownership of the Golf Share, or in the alternative to issue one fully paid stockholders to the corporation, should be embodied in the Articles of
share of stock of Valley Golf of the same class as the Golf Share to the wife. Incorporation, and not merely in the by-laws. Moreover, the by-laws of
Damages totaling P90,000.00 were also awarded to the wife. petitioner should have provided formal notice and hearing procedure
before a member’s share may be seized and sold.
The SEC hearing officer ruled that under Section 67, paragraph 2 of the The procedure for stock corporation’s recourse on unpaid subscription is
Corporation Code, a share stock could only be deemed delinquent and sold not applicable in member’s shares in a non-stock corporation.
in an extrajudicial sale at public auction only upon the failure of the SC proceeded to declare the sale as invalid. SC found that Valley Golf acted
stockholder to pay the unpaid subscription or balance for the share. in bad faith when it sent the final notice to Caram under the pretense they
However, the section could not have applied in Caram’s case since he had believed him to be still alive, when in fact they had very well known that
fully paid for the Golf Share and he had been assessed not for the share he had already died. The Court stated:
itself but for his delinquent club dues. Proceeding from the foregoing Whatever the reason Caram was unable to respond to the earlier notices,
premises, the SEC hearing officer concluded that the auction sale had no the fact remains that at the time of the final notice, Valley Golf knew that
basis in law and was thus a nullity. The SEC en banc and the Court of Caram, having died and gone, would not be able to settle the obligation
Appeals affirmed the hearing officer’s decision, and so the petitioner himself, yet they persisted in sending him notice to provide a color of
appealed before SC. regularity to the resulting sale.
ISSUE: WON a non-stock corporation seize and dispose of the membership That reason alone, evocative as it is of the absence of substantial justice in
share of a fully-paid member on account of its unpaid debts to the the sale of the Golf Share, is sufficient to nullify the sale and sustain the
corporation when it is authorized to do so under the corporate by-laws but rulings of the SEC and the Court of Appeals.
not by the Articles of Incorporation? Moreover, the utter and appalling bad faith exhibited by Valley Golf in
RULING: The Supreme Court ruled that there is a specific provision under sending out the final notice to Caram on the deliberate pretense that he
Title XI on Non-Stock Corporations of the Corporation Code dealing with was still alive could bring into operation Articles 19, 20 and 21 under the
the termination of membership in a non-stock corporation such as Valley Chapter on Human Relations of the Civil Code. These provisions enunciate
Golf. a general obligation under law for every person to act fairly and in good
Section 91 of the Corporation Code provides: faith towards one another. Non-stock corporations and its officers are not
SEC. 91. Termination of membership.—Membership shall be terminated in exempt from that obligation.
the manner and for the causes provided in the articles of incorporation or
the by-laws. Termination of membership shall have the effect of PMI Colleges v. NLRC
extinguishing all rights of a member in the corporation or in its property, G.R. No. 121466
unless otherwise provided in the articles of incorporation or the by-laws. August 15, 1997
(Emphasis supplied)
A share can only be deemed delinquent and sold at public auction only FACTS:
In 1991, PMI Colleges hired private respondent, Alejandro Galvan as has never been denied by private respondent does not necessarily signify
contractual instructor with an agreement that the latter shall be paid a admission of its existence because technicalities of law and procedure and
rate on hourly basis. Galvan and other instructors were compensated for the rules obtaining in the courts of law do not strictly apply to proceedings
services rendered during the first three periods of the above mentioned of this nature.
contract but for reasons unknown to them, they stopped receiving
payment for the succeeding rendition of services. Repeated demands on [G.R. No. 141735. June 8, 2005]
petitioner to release the salaries remained unheeded. Private respondent SAPPARI K. SAWADJAAN, petitioner, vs. THE HONORABLE COURT OF
filed a complaint before the National Capital Region Arbitration Branch APPEALS, THE CIVIL SERVICE COMMISSION and AL-AMANAH INVESTMENT
seeking payment of the salaries he earned while conducting on-the-job BANK OF THE PHILIPPINES, respondents.
training courses, conducted outside the school premises. Attempts at
amicable settlement having failed the parties were required to submit FACTS:
their respective position papers. On the basis thereof, the Labor Arbiter
issued an order declaring the case submitted for decision. Such order was Sappari K. Sawadjaan was among the first employees of the Philippine
vigorously opposed by petitioner insisting that there should be a formal Amanah Bank (PAB) when it was created by virtue of Presidential Decree
hearing on the merits in view of the important factual issues raised. A No. 264 on 02 August 1973. He rose through the ranks, working his way up
decision was subsequently rendered by the Labor Arbiter finding for the from his initial designation as security guard, to settling clerk, bookkeeper,
private respondent. On appeal, the NLRC affirmed the same in toto. In this credit investigator, project analyst, appraiser/ inspector, and eventually,
petition for review, petitioner imputes grave abuse of discretion on the loans analyst.
part of the Labor Arbiter in rendering the assailed decision without a
formal hearing. Petitioner also assails the legal soundness of the monetary In February 1988, while still designated as appraiser/investigator,
award in favor of the private respondent. Sawadjaan was assigned to inspect the properties offered as collaterals by
Compressed Air Machineries and Equipment Corporation (CAMEC) for a
ISSUE: whether or not Galvan’s employment contract is void credit line of Five Million Pesos (P5,000,000.00). The properties consisted
of two parcels of land covered by Transfer Certificates of Title (TCTs) No. N-
HELD: 130671 and No. C-52576. On the basis of his Inspection and Appraisal
No. We cannot concede that such contract would be invalid just because Report, the PAB granted the loan application. When the loan matured on
the signatory thereon was not the Chairman of the Board which allegedly 17 May 1989, CAMEC requested an extension of 180 days, but was granted
violated petitioner's by-laws. Since by-laws operate merely as internal only 120 days to repay the loan.
rules among the stockholders, they cannot affect or prejudice third
persons who deal with the corporation, unless they have knowledge of the When CAMEC failed to pay, an investigation was made. It was found out
same." No proof appears on record that private respondent ever knew that the title given was spurious and the property had a prior existing
anything about the provisions of said by-laws. In fact, petitioner itself mortgage. The fiasco cost the bank 6 million in losses which prompted the
merely asserts the same without even bothering to attach a copy or Board to charge petitioner with Dishonesty in the Performance of Official
excerpt thereof to show that there is such a provision. How can it now Duties and/or Conduct Prejudicial to the Best Interest of the Service and
expect the Labor Arbiter and the NLRC to believe it? That this allegation preventively suspending him.
undisputed fact that AIIBP is the petitioners employer. AIIBP chose to
Petitioner filed an appeal with the Merit System Protection Board which retain his services during its reorganization, controlled the means and
upheld the bank’s resolution. A Motion for Reconsideration was then filed methods by which his work was to be performed, paid his wages, and,
with the Supreme Court but was likewise dismissed. Thus this petition for eventually, terminated his services.
certiorari.
And though he has had ample opportunity to do so, the petitioner has not
ISSUE: Whether or not since respondent AIIBP failed to file its by-laws alleged that he is anything other than an employee of AIIBP. He has neither
within the designated 60 days from the effectivity of Rep. Act No. 6848, all claimed, nor shown, that he is a stockholder or an officer of the
proceedings initiated by AIIBP and all actions resulting therefrom are a corporation. Having accepted employment from AIIBP, and rendered his
patent nullity. services to the said bank, received his salary, and accepted the promotion
given him, it is now too late in the day for petitioner to question its
HELD: existence and its power to terminate his services. One who assumes an
obligation to an ostensible corporation as such, cannot resist performance
No, a corporation which has failed to file its by-laws within the prescribed thereof on the ground that there was in fact no corporation.
period does not ipso facto lose its powers as such. The SEC Rules on
Suspension/Revocation of the Certificate of Registration of Corporations, Further, as an investigator for the company, not only did he fail to conduct
details the procedures and remedies that may be availed of before an these routine checks, but he also deliberately misrepresented in his
order of revocation can be issued. There is no showing that such a appraisal report that after reviewing the documents and conducting a site
procedure has been initiated in this case. The AIIBP was created by Rep. inspection, he found the CAMEC loan application to be in order. From the
Act No. 6848. It has a main office where it conducts business, has foregoing, we find that the CSC and the court a quo committed no grave
shareholders, corporate officers, a board of directors, assets, and abuse of discretion when they sustained Sawadjaans dismissal from
personnel. It is, in fact, here represented by the Office of the Government service. WHEREFORE, the petition is DISMISSED.
Corporate Counsel, the principal law office of government-owned
corporations, one of which is respondent bank. At the very least, by its SAN MIGUEL CORPORATION (MANDAUE PACKAGING PRODUCTS
failure to submit its by-laws on time, the AIIBP may be considered a de PLANTS), petitioner, vs. MANDAUE PACKING PRODUCTS PLANTS-SAN
facto corporation whose right to exercise corporate powers may not be PACKAGING PRODUCTS –SAN MIGUEL CORPORATION MONTHLIES RANK-
inquired into collaterally in any private suit to which such corporations may AND-FILE UNION – FFW (MPPP-SMPP-SMAMRFU-FFW), respondent.
be a party. Post under case digests, labor law at Tuesday, February 21, 2012 Posted by
Schizophrenic Mind
In any case, petitioners argument is irrelevant because this case is not a Facts: On 15 June 1998, respondent, identifying itself as an affiliate of
corporate controversy, but a labor dispute; and it is an employers basic Federation of Free Workers (FFW), filed a petition for certification election
right to freely select or discharge its employees, if only as a measure of with the DOLE Regional Office. In the petition, respondent stated that it
self-protection against acts inimical to its interest.Regardless of whether sought to be certified and to represent the permanent rank-and-file
AIIBP is a monthly paid employees of the petitioner. A set of documents were
corporation, a partnership, a sole proprietorship, or a sari-saristore, it is an attached to the petition, including a (1) Charter Certificate issued by FFW
certifying that respondent was a duly certified local chapter of FFW, (2) In doing so, the Court acknowledges that the strict letter of the procedural
copy of the constitution of respondent, (3) a list of respondent’s officers, rule was not complied with. However, labor laws are generally construed
(4) a certification signifying that respondent had just been organized and liberally in favor of labor, especially if doing so affirms the constitutionally
no amount had yet been collected from its members and (5) a list of all the guaranteed right to self-organization.
rank-and-file monthly paid employees of the Mandaue Packaging Products
Plants and Mandaue Glass Plant Under Section 3, Rule VI of Department Order No. 9, it is the submission of
these same documents to the Regional Office or Bureau that operates to
On 27 July 1998, petitioner filed a motion to dismiss the petition for vest legal personality on the local/chapter. There is no doubt that on 15
certification election on the sole ground that herein respondent is not June 1998, or the date respondent filed its petition for certification
listed or included in the roster of legitimate labor organizations based on election, attached thereto were respondent’s constitution, the names and
the certification issued by the Officer-In-Charge, Regional Director of the addresses of its officers, and the charter certificate issued by the national
DOLE Regional Office. union FFW.

Undersecretary Baldoz concluded that respondent acquired legal However, respondent never submitted a separate by-laws, nor does it
personality as early as 15 June 1998, the date it submitted the required appear that respondent ever intended to prepare a set thereof. Section
documents, citing Section 3, Rule VI of the New Rules Implementing the 1(c), Rule VI, Book V of Department Order No. 9 provides that the
Labor Code (Implementing Rules) which deems that a local/chapter submission of both a constitution and a set of by-laws is required, or at
acquires legal personality from the date of filing of the complete least an indication that the local/chapter is adopting the constitution and
documentary requirements as mandated in the Implementing Rules. by-laws of the federation or national union. A literal reading of the
provision might indicate that the failure to submit a specific set of by-laws
These two conclusions of the DOLE were affirmed in the assailed Decision is fatal to the recognition of the local/chapter. However, a critical
of the Court of Appeals examination of respondent’s constitution reveals that it is sufficiently
comprehensive in establishing the necessary rules for its operation. These
Issue: Whether or not respondent has acquired legal personality premises considered, there is clearly no need for a separate set of by-laws
to be submitted by respondent.
Held: YES. It could be properly said that at the exact moment respondent
was filing the petition for certification, it did not yet possess any legal Republic of the Philippines
personality, since the requisites for acquisition of legal personality under SUPREME COURT
Section 3, Rule VI of Department Order No. 9 had not yet been complied Manila
with. It could also be discerned that the intention of the Labor Code and its FIRST DIVISION
Implementing Rules that only those labor organizations that have acquired G.R. No. 203993 April 20, 2015
legal personality are capacitated to file petitions for certification elections. PRISCILO B. PAZ,* Petitioner,
Such is the general rule. Yet there are peculiar circumstances in this case vs.
that allow the Court to rule that respondent acquired the requisite legal NEW INTERNATIONAL ENVIRONMENTAL UNIVERSALITY, INC.,
personality at the same time it filed the petition for certification election. Respondent.
DECISION supposedly promised to buy, but did not.13
PERLAS-BERNABE, J.: On July 23, 2002, petitioner sent a final letter14 addressed to "MR. ALLAN J.
Assailed in this petition for review on certiorari1 are the Decision2 dated CLARKE, Chairman, CEO, New International Environmental University, Inc. x
January 31, 2012 and the Resolution3 dated October 2, 2012 of the Court x x," strongly demanding the latter to immediately vacate the hangar
of Appeals (CA) in CA-G.R. CV No. 00903-MIN, which affirmed the Decision4 space. He further informed Capt. Clarke that the company will "apply for
dated May 19, 2006 of the Regional Trial Court of Davao City, Branch 33 immediate electrical disconnection with the Davao Light and Power
(RTC) in Civil Case No. 29,292-2002, declaring petitioner Captain Priscilo B. Company (DLPC)[,] so as to compel [the latter] to desist from continuing
Paz (petitioner) liable for breach of contract. with [the] works" thereon.15
The Facts On September 4, 2002, respondent New International Environmental
On March 1, 2000, petitioner, as the officer-in-charge of the Aircraft Universality, Inc.16 (respondent) filed a complaint17 against petitioner for
Hangar at the Davao International Airport, Davao City, entered into a breach of contract before the RTC, docketed as Civil Case No. 29,292-
Memorandum of Agreement5 (MOA) with Captain Allan J. Clarke (Capt. 2002,18 claiming that: (a) petitioner had disconnected its electric and
Clarke), President of International Environmental University, whereby for a telephone lines; (b) upon petitioner’s instruction, security guards
period of four (4) years, unless pre-terminated by both parties with six (6) prevented its employees from entering the leased premises by blocking
months advance notice, the former shall allow the latter to use the aircraft the hangar space with barbed wire; and (c) petitioner violated the terms of
hangar space at the said Airport "exclusively for company the MOA when he took over the hangar space without giving respondent
aircraft/helicopter."6 Said hangar space was previously leased to Liberty the requisite six (6)-month advance notice of termination.19
Aviation Corporation, which assigned the same to petitioner. 7 In his defense, petitioner alleged, among others, that: (a) respondent had
On August 19, 2000, petitioner complained in a letter 8 addressed to "MR. no cause of action against him as the MOA was executed between him and
ALLAN J. CLARKE, International Environmental Universality, Inc. x x x" that Capt. Clarke in the latter’s personal capacity; (b) there was no need to wait
the hangar space was being used "for trucks and equipment, vehicles for the expiration of the MOA because Capt. Clarke performed highly risky
maintenance and fabrication," instead of for "company helicopter/aircraft" works in the leased premises that endangered other aircrafts within the
only, and thereby threatened to cancel the MOA if the "welding, grinding, vicinity; and (c) the six (6)-month advance notice of termination was
and fabrication jobs" were not stopped immediately.9 already given in the letters he sent to Capt. Clarke.20
On January 16, 2001, petitioner sent another letter10 to "MR. ALLAN J. On March 25, 2003, the RTC issued a Writ of Preliminary Injunction 21
CLARKE, International Environmental Universality, Inc. x x x," reiterating ordering petitioner to: (a) immediately remove all his aircrafts parked
that the hangar space "must be for aircraft use only," and that he will within the leased premises; (b) allow entry of respondent by removing the
terminate the MOA due to the safety of the aircrafts parked nearby. He steel gate installed thereat; and (c) desist and refrain from committing
further offered a vacant space along the airport road that was available further acts of dispossession and/or interference in respondent’s
and suitable for Capt. Clarke’s operations.11 occupation of the hangar space.
On July 19, 2002, petitioner sent a third letter,12 this time, addressed to For failure of petitioner to comply with the foregoing writ, respondent filed
"MR. ALLAN JOSEPH CLARKE, CEO, New International Environmental on October 24, 2003 a petition for indirect contempt22 before the RTC,
University, Inc. x x x," demanding that the latter vacate the premises due docketed as Civil Case No. 30,030-2003, which was tried jointly with Civil
to the damage caused by an Isuzu van driven by its employee to the left Case No. 29,292-2002.23
wing of an aircraft parked inside the hangar space, which Capt. Clarke had The RTC Ruling
After due trial, the RTC rendered a Decision 24 dated May 19, 2006 finding employees out.33 Despite the service of the injunctive writ upon petitioner,
petitioner: (a) guilty of indirect contempt for contumaciously disregarding respondent was not allowed to possess and occupy the leased premises, as
its Order25 dated March 6, 2003, by not allowing respondent to possess in fact, the trial court even had to order on March 8, 2004 the inventory of
and occupy the leased premises pending final decision in the main case; the items locked inside the bodega of said premises that was kept off-
and (b) liable for breach of contract for illegally terminating the MOA even limits to respondent. Hence, petitioner was declared guilty of indirect
before the expiration of the term thereof.26 He was, thus, ordered to pay a contempt.34
fine of P5,000.00, and to pay respondent nominal damages of P100,000.00 Aggrieved, petitioner elevated his case on appeal before the CA, arguing
and attorney’s fees of P50,000.00 with legal interest, and costs of suit.27 that the trial court should have dismissed outright the cases against him
On the challenge to respondent’s juridical personality, the RTC quoted the for failure of respondent to satisfy the essential requisites of being a party
Order28 dated April 11, 2005 of the SEC explaining that respondent was to an action, i.e., legal personality, legal capacity to sue or be sued, and
issued a Certificate of Incorporation on September 3, 2001 as New real interest in the subject matter of the action.35
International Environmental Universality, Inc. but that, subsequently, when The CA Ruling
it amended its Articles of Incorporation on November 14, 2001 and July 11, Finding that the errors ascribed by petitioner to the trial court only
2002, the SEC Extension Office in Davao City erroneously used the name touched the civil action for breach of contract, the appellate court resolved
New International Environmental University, Inc.29 The latter name was the appeal against him in a Decision 36 dated January 31, 2012, and
used by respondent when it filed its amended complaint on September 11, affirmed the RTC’s finding of petitioner’s liability for breach of contract. 37
2002 and the petition for indirect contempt against petitioner on October The CA ruled that, while there was no corporate entity at the time of the
24, 2003 believing that it was allowed to do so, as it was only on April 11, execution of the MOA on March 1,2000 when Capt. Clarke signed as
2005 when the SEC directed it to revert to its correct name. 30 "President of International Environmental University," petitioner is
The RTC further declared that the MOA, which was "made and executed by nonetheless estopped from denying that he had contracted with
and between CAPT. [PRISCILO] B. PAZ, Officer-In-Charge of Aircraft Hangar respondent as a corporation, having recognized the latter as the "Second
at Davao International Airport, Davao City, Philippines, hereinafter called Party" in the MOA that "will use the hangar space exclusively for company
as FIRST PARTY [a]nd CAPT. ALLAN J. CLARKE[,] President of aircraft/helicopter."38 Petitioner was likewise found to have issued checks
INTERNATIONAL ENVIRONMENTAL UNIVERSITY with office address at to respondent from May 3, 2000 to October 13, 2000, which belied his
LIBERTY AVIATION HANGAR, Davao International Airport, Davao City, claim of contracting with Capt. Clarke in the latter’s personal capacity.[[39]
Philippines, hereinafter called as SECOND PARTY," 31 was executed by the Petitioner moved for the reconsideration 40 of the foregoing Decision,
parties not only in their personal capacities but also in representation of raising as an additional issue the death41 of Capt. Clarke which allegedly
their respective corporations or entities.32 warranted the dismissal of the case. 42 However, the motion was denied in
On the issue of the violation of the terms of the MOA, the RTC found a Resolution43 dated October 2, 2012 where the CA held that Capt. Clarke
respondent to have been effectively evicted from the leased premises was merely an agent of respondent, who is the real party in the case. Thus,
between July and August of2002, or long before the expiration of the term Capt. Clarke’s death extinguished only the agency between him and
thereof in 2004, when petitioner: (a) placed a gate/fence that prevented respondent, not the appeal against petitioner.44
ingress to and egress from the leased premises; (b) parked a plane inside Undaunted, petitioner is now before the Court via the instant petition, 45
and outside the leased premises; (c) disconnected the electrical and claiming that: (a) the CA erred in not settling his appeal for both the breach
telephone connections of respondent; and (d) locked respondent’s of contract and indirect contempt cases in a single proceeding and,
consequently, the review of said cases before the Court should be reiterated and strongly demanded the former to immediately vacate the
consolidated,46 and (b) the CA should have dismissed the cases against him hangar space his "company is occupying/utilizing."60
for (1) lack of jurisdiction of the trial court in view of the failure to implead Section 2161 of the Corporation Code62 explicitly provides that one who
Capt. Clarke as an indispensable party;47 (2) lack of legal capacity and assumes an obligation to an ostensible corporation, as such, cannot resist
personality on the part of respondent;48 and (3) lack of factual and legal performance thereof on the ground that there was in fact no corporation.
bases for the assailed RTC Decision.49 Clearly, petitioner is bound by his obligation under the MOA not only on
The Court’s Ruling estoppel but by express provision of law. As aptly raised by respondent in
The petition lacks merit. its Comment63 to the instant petition, it is futile to insist that petitioner
First, on the matter of the consolidation50 of the instant case with G.R. No. issued the receipts for rental payments in respondent’s name and not with
202826 entitled "Priscilo B. Paz v. New International Environmental Capt. Clarke’s, whom petitioner allegedly contracted in the latter’s
University," the petition for review of the portion of the RTC Decision personal capacity, only because it was upon the instruction of an
finding petitioner guilty of indirect contempt, 51 the Court had earlier employee.64 Indeed, it is disputably presumed that a person takes ordinary
denied said motion in a Resolution52 dated July 24, 2013 on the ground care of his concerns,65 and that all private transactions have been fair and
that G.R. No. 202826 had already been denied 53 with finality.54 Thus, any regular.66 Hence, it is assumed that petitioner, who is a pilot, knew what he
further elucidation on the issue would be a mere superfluity. was doing with respect to his business with respondent.
Second, whether or not Capt. Clarke should have been impleaded as an Petitioner’s pleadings, however, abound with clear indications of a
indispensable party was correctly resolved by the CA which held that the business relationship gone sour. In his third letter dated July 19, 2002,
former was merely an agent of respondent. 55 While Capt. Clarke’s name petitioner lamented the fact that Capt. Clarke’s alleged promise to buy an
and signature appeared on the MOA, his participation was, nonetheless, aircraft had not materialized.67 He likewise insinuated that Capt. Clarke's
limited to being a representative of respondent. As a mere representative, real motive in staying in the leased premises was the acquisition of
Capt. Clarke acquired no rights whatsoever, nor did he incur any liabilities, petitioner's right to possess and use the hangar space.68
arising from the contract between petitioner and respondent. Therefore, Be that as it may, it is settled that courts have no power to relieve parties
he was not an indispensable party to the case at bar.56 from obligations they voluntarily assumed, simply because their contracts
It should be emphasized, as it has been time and again, that this Court is turn out to be disastrous deals or unwise investments. 69
not a trier of facts, and is thus not duty-bound to analyze again and weigh The lower courts, therefore, did not err in finding petitioner liable for
the evidence introduced in and considered by the tribunals. 57 When breach of contract for effectively evicting respondent from the leased
supported by substantial evidence, the findings of fact by the CA are premises even before the expiration of the term of the lease.1âwphi1 The
conclusive and binding on the parties and are not reviewable by this Court, Court reiterates with approval the ratiocination of the RTC that, if it were
unless the case falls under any of the exceptions,58 none of which was true that respondent was violating the terms and conditions of the lease,
established herein. "[petitioner] should have gone to court to make the [former] refrain from
The CA had correctly pointed out that, from the very language itself of the its 'illegal' activities or seek rescission of the [MOA], rather than taking the
MOA entered into by petitioner whereby he obligated himself to allow the law into his own hands."70
use of the hangar space "for company aircraft/helicopter," petitioner WHEREFORE, the petition is DENIED. The Decision dated January 31, 2012
cannot deny that he contracted with respondent. 59 Petitioner further and the Resolution dated October 2, 2012 of the Court of Appeals in CA-
acknowledged this fact in his final letter dated July 23, 2002, where he G.R. CV No. 00903-MIN are hereby AFFIRMED.
SO ORDERED.

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